UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number: 1-8038

KEY ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

1301 McKinney Street, Suite 1800, Houston, Texas 77010

(Address of principal executive offices) (Zip Code)

(713) 651-4300

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x     No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o     No   x

As of April 30, 2008, the number of outstanding shares of common stock of the registrant was 125,298,014.

KEY ENERGY SERVICES, INC.

INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

FORWARD-LOOKING STATEMENTS

In addition to statements of historical fact, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Statements that are not historical in nature or that relate to future events and conditions are, or may be deemed to be, forward-looking statements.  These “forward-looking statements” are based on our current expectations, estimates and projections about Key Energy Services, Inc. (“the Company”), our industry and management’s beliefs and assumptions concerning future events and financial trends affecting our financial condition and results of operations.  In some cases, you can identify these statements by terminology such as “may,” “will,” “predicts,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology.  These statements are only predictions and are subject to substantial risks and uncertainties.  Actual performance or results may differ materially and adversely.

We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this report except as required by law.  All of our written and oral forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements.

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PART I — FINANCIAL INFORMATION

Item 1.   Financial Statements.

Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

See the accompanying notes which are an integral part of these condensed consolidated unaudited financial statements

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 Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

See the accompanying notes which are an integral part of these condensed consolidated unaudited financial statements

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Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

See the accompanying notes which are an integral part of these condensed consolidated unaudited financial statements

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Key Energy Services, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See the accompanying notes which are an integral part of these condensed consolidated unaudited financial statements

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Key Energy Services, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

1.             GENERAL

Key Energy Services, Inc. and its wholly owned subsidiaries (collectively, the “Company,” “we,” “us,” “its,” and “our”) provides a complete range of well services to major oil companies and independent oil and natural gas production companies, including rig-based well maintenance, workover, well completion, and recompletion services, oilfield transportation services, pressure pumping services, fishing and rental services, and ancillary oilfield services.

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).  The condensed December 31, 2007 balance sheet was prepared from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  Certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report on Form 10-Q.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

The unaudited condensed consolidated financial statements contained in this report include all material adjustments that, in the opinion of management, are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented herein.  The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results expected for the full year or any other interim period due to fluctuations in demand for our services, timing of maintenance and other expenditures, and other factors.

2.             SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

The preparation of these consolidated financial statements requires us to develop estimates and to make assumptions that affect our financial position, results of operations and cash flows. These estimates also impact the nature and extent of our disclosure, if any, of our contingent liabilities. Among other things, we use estimates to (i) analyze assets for possible impairment, (ii) determine depreciable lives for our assets, (iii) assess future tax exposure and realization of deferred tax assets, (iv) determine amounts to accrue for contingencies, (v) value tangible and intangible assets, and (vi) assess workers’ compensation, vehicular liability, self-insured risk accruals and other insurance reserves. Our actual results may differ materially from these estimates. We believe that our estimates are reasonable.

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”), on January 1, 2008.  SFAS 159 permits companies to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Companies choosing such an election report unrealized gains and losses on items for which the Fair Value Option has been elected in earnings at each subsequent reporting period.  We did not elect to measure any of our financial assets or liabilities using the Fair Value Option.  We will assess at each measurement date whether to use the Fair Value Option on any future financial assets or liabilities as permitted pursuant to the provisions of SFAS 159.

There have been no material changes or developments in the Company’s evaluation of accounting estimates and underlying assumptions or methodologies that the Company believes to be Critical Accounting Policies and Estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

3.             NEW ACCOUNTING STANDARDS

SFAS 157.  In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value, and expanding disclosures about fair value measurements.  SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.

In February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”).  FSP FAS 157-2 delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal

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years, for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the registrant’s

financial statements on a recurring basis. The adoption of SFAS 157, as modified by FSP FAS 157-2, did not have a material impact on our financial position, results of operations, or cash flows.

SFAS 141(R).  In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions. Specific changes in SFAS 141(R) from previously issued guidance include:

· Acquisition costs will generally be expensed as incurred;

· Noncontrolling interests will be valued at fair value at the acquisition date;

· Certain acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently remeasured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

· In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

· Restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and

· Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

SFAS 141(R) also includes new disclosure requirements related to business combinations. This statement applies to all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and earlier adoption is prohibited. The impact of the adoption of this standard on the Company’s financial position, results of operations, and cash flows will not be known until the Company completes a business combination subsequent to the adoption date of this standard.

SFAS 160.  In December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements: an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest (formerly referred to as “minority interests”) in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to a noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gains or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The Company is in the process of determining the impact the adoption of this standard will have on the Company’s financial position, results of operations and cash flows.

SFAS 161.  In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133” (“SFAS 161”).  SFAS 161 requires more disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  We will adopt the provisions of SFAS 161 on January 1, 2009.  The Company currently has no financial instruments that qualify as derivatives, and we do not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations, and cash flows.

4.             ACQUISITIONS

The Company has acquired businesses consistent with its long-term growth strategy. Results of operations for acquisitions are included in the unaudited condensed consolidated statements of operations from the date of acquisition. The balances included in the unaudited condensed consolidated balance sheets related to acquisitions made during the third and

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fourth quarters of 2007 and the first quarter of 2008 are based on preliminary information and are subject to change when final asset valuations are obtained and the potential for liabilities has been evaluated. Acquisitions are accounted for using the purchase method of accounting and the purchase price is allocated to the net assets acquired based upon their estimated fair values at the date of acquisition. Final valuations of assets and liabilities are obtained and recorded as soon as practicable and within one year from the date of the acquisition.

On January 17, 2008, the Company purchased the fishing and rental assets of Tri-Energy Services, LLC (“Tri-Energy”), for approximately $1.9 million in cash.  These assets were integrated into our Fishing and Rental segment.  The equity interests of Tri-Energy were owned by employees of the Company who joined the Company in October 2007 in connection with the acquisition of Moncla Well Service, Inc. and related entities.  The purchase price was allocated to the assets purchased and the acquisition of Tri-Energy did not result in the establishment of goodwill.

On September 5, 2007, the Company acquired Advanced Measurements, Inc., which operates in Canada and is a technology company focused on oilfield service equipment controls, data acquisition, and digital information flow.  The purchase price was $6.6 million in cash and $2.9 million in assumed debt and was paid in September 2007.  The purchase price is subject to a working capital adjustment mechanism which was settled in February 2008 and resulted in additional consideration paid of approximately $0.9 million.  This also resulted in additional goodwill of $0.9 million.

On October 25, 2007, the Company acquired Moncla Well Service, Inc. and related entities which operate well service rigs, barges, and ancillary equipment in the southeastern United States.  During the three months ended March 31, 2008, the Company refined its fair value allocation of the net assets acquired by decreasing working capital by $0.7 million with a corresponding increase to goodwill in the unaudited condensed consolidated balance sheet as of March 31, 2008.

On December 7, 2007, the Company acquired the well service assets and related equipment of Kings Oil Tools, Inc., a California-based well service company.  During the three months ended March 31, 2008, the Company revised its fair value allocation of the net assets acquired by increasing the fair value of the well service assets acquired by $1.5 million, decreased the fair value of working capital accounts by $0.1 million, and paid additional fees related to the closing of the transaction of $0.1 million.  These changes were offset with a corresponding net decrease to goodwill in the unaudited condensed consolidated balance sheet as of March 31, 2008.

5.             SUPPLEMENTAL FINANCIAL INFORMATION

The table below presents the comparative detailed financial information of current accrued liabilities at March 31, 2008 and December 31, 2007.

The table below presents the comparative detailed financial information of our other non-current accrued liabilities at March 31, 2008 and December 31, 2007.

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The table below presents the comparative supplemental cash flow information for the three months ended March 31, 2008 and 2007:

Cash paid for interest includes cash payments for interest on our long-term debt and capital lease obligations and commitment and agency fees paid.

6.             GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the three months ended March 31, 2008 are as follows:

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The components of our intangible assets are as follows:

Certain of our intangible assets are denominated in currencies other than U.S. Dollars and as such the values of those assets are subject to fluctuations associated with changes in exchange rates.  Additionally, certain of these assets are also subject to purchase accounting adjustments.  The estimated fair value of intangible assets obtained through acquisitions consummated in the preceding twelve months are based on preliminary information which is subject to change when final valuations are obtained.  Amortization expense for our intangible assets was $3.8 million and $0.7 million for the three months ended March 31, 2008 and 2007, respectively.

7.             INVESTMENT IN IROC ENERGY SERVICES CORP.

As of March 31, 2008 and December 31, 2007, we owned 8,734,469 shares of IROC Energy Services Corp., formerly known as IROC Systems Corp. (“IROC”), an Alberta-based oilfield services company. This represented approximately 19.7% of IROC’s outstanding common stock on March 31, 2008 and December 31, 2007.  IROC shares trade on the Toronto Venture Stock Exchange and had a closing price of $0.80 CDN and $0.74 CDN per share on March 31, 2008 and December 31, 2007, respectively.  Mr. William Austin, our Chief Financial Officer, and Mr. Newton W. Wilson III, our General Counsel, serve on the board of directors of IROC.

We have significant influence over the operations of IROC through our ownership interest and representation on IROC’s board of directors, but we do not control it.  We account for our investment in IROC using the equity method.  Our investment in IROC totaled $10.6 million and $11.2 million as of March 31, 2008 and December 31, 2007, respectively.  The pro-rata share of IROC’s earnings and losses to which we are entitled is recorded in our condensed consolidated statements of operations as a component of other income and expense, with an offsetting increase or decrease to the value of our investment, as appropriate.  Any earnings distributed back to us from IROC in the form of dividends would result in a decrease in the value of our equity investment.

We recorded less than $0.1 million and $0.6 million of income related to our investment in IROC for the three months ended March 31, 2008 and 2007, respectively.  During those time periods, no earnings were distributed back to us by IROC in the form of dividends.

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An impairment review of our equity method investment in IROC is performed on a quarterly basis to determine if there has been a decline in fair value that is other than temporary. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, fair value is based on an estimate of discounted cash flows. In determining whether the decline is other than temporary, we consider the cyclicality of the industry in which the investment operates, its historical performance, its performance in relation to its peers and the current economic environment. Future conditions in the industry, operating performance and performance in relation to peers and the future economic environment may vary from our current assessment of recoverability. Such future conditions could therefore result in a determination that a decline in fair value is other than temporary. IROC’s stock price is currently depressed, and as such the fair value of the Company’s investment is less than the amount reflected in the Company’s consolidated financial statements. If we later determine that the decline is other than temporary, we would record a write-down in the carrying value of our asset to the then current fair market value.

8.             LONG-TERM DEBT

The components of our long-term debt are as follows:

Senior Secured Credit Facility

The Company maintains a revolving credit agreement with a syndicate of banks of which Bank of America Securities LLC and Wells Fargo Bank, N.A. are the Administrative Agents (“Senior Secured Credit Facility”).  The aggregate lending commitment of this facility is $400.0 million and allows for a combination of borrowings and issuances of letters of credit. There were borrowings of $50.0 million and outstanding letters of credit $61.1 million under the Senior Secured Credit Facility at March 31, 2008. The weighted-average interest rate on the outstanding borrowings of the Senior Secured Credit Facility was 4.17125% at March 31, 2008.  The Senior Secured Credit Facility requires the Company to maintain a consolidated interest coverage ratio of at least 3.0 to 1.0, maintain a consolidated leverage ratio of not more than 3.5 to 1.0, and to not exceed capital expenditures of $250.0 million in any fiscal year. The Company was in compliance with these covenants at March 31, 2008.

All obligations under the Senior Secured Credit Facility are guaranteed by most of our subsidiaries and are secured by most of our assets, including our accounts receivable, inventory and equipment.

9.             INCOME TAXES

The Company’s effective tax rate for the three months ended March 31, 2008 and 2007 was 39.5 % and 38.4%, respectively.  The primary difference between the statutory rate of 35% and our effective tax rate relates to state and foreign taxes.

As of March 31, 2008 and December 31, 2007, we had approximately $6.9 million and $6.8 million, respectively, of unrecognized tax benefits, net of federal tax benefit, which, if recognized, would impact our effective tax rate.  We are subject to U.S. Federal Income Tax as well as income taxes in multiple state and foreign jurisdictions.  We have substantially concluded all U.S. federal and state tax matters through the year ended December 31, 2002.

We recognize accrued interest expense and penalties related to unrecognized tax benefits as income tax expense.  We have accrued approximately $2.5 million and $2.3 million for the payment of interest and penalties as of March 31, 2008 and December 31, 2007.  We do not expect any substantial changes within the next 12 months related to uncertain tax positions.

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During the first quarter of 2008, the Company applied approximately $14.5 million of the income tax refund receivable due as of December 31, 2007 against the Company’s current income taxes payable.  No cash refund was received by the Company.

10.          COMMITMENTS AND CONTINGENCIES

Litigation.  Various suits and claims arising in the ordinary course of business are pending against us. Due to locations where we conduct business in the continental United States, we are often subject to jury verdicts and arbitration hearings that result in outcomes in favor of the plaintiffs. We do not believe that the disposition of any of these matters will result in a material adverse impact on our consolidated financial position, results of operations or cash flows.

Gonzales Matter.  In September 2005, a class action lawsuit, Gonzales v. Key Energy Services, Inc., was filed in Ventura County, California Superior Court, alleging that Key did not pay its hourly employees for travel time between the yard and the wellhead and that certain employees were denied meal and rest periods between shifts.  We have recorded a liability for this matter and do not expect that the conclusion of this matter will have a material impact on our financial position, results of operations, or cash flows.

Litigation with Former Officers and Employees.    We were named in a lawsuit by our former general counsel, Jack D. Loftis, Jr., filed in the U.S. District Court, District of New Jersey on April 21, 2006, in which he alleges a “whistle-blower” claim under the Sarbanes-Oxley Act, breach of contract, breach of good faith and fair dealing, breach of fiduciary duty, and wrongful termination. On August 17, 2007, the Company filed counterclaims against Mr. Loftis alleging attorney malpractice, breach of contract, and breach of fiduciary duties. In its counterclaims, the Company seeks repayment of all severance paid to Mr. Loftis to date (approximately $0.8 million) plus benefits paid during the period July 8, 2004 to September 21, 2004, and damages relating to the allegations of malpractice and breach of fiduciary duties.  The case was transferred to and is now pending in the U.S. District Court for the Eastern District of Pennsylvania.

On September 3, 2006, our former controller and assistant controller filed a joint complaint against the Company in the 133rd District Court, Harris County, Texas, alleging constructive termination and breach of contract.  Additionally, on January 11, 2008, our former Chief Operating Officer, James Byerlotzer, filed a lawsuit in the 55th District Court, Harris County, Texas, alleging breach of contract based on his inability to exercise his stock options during the period that Key was not current in its SEC filings, and based on Key’s failure to provide him shares of restricted stock.

We are vigorously defending against these claims; however, we cannot predict the outcome of the lawsuits.

Shareholder Class Action Suits and Derivative Actions.    Since June 2004, we and certain of our officers and directors were named as a defendant in six class action complaints for alleged violations of federal securities laws, which were filed in federal district court in Texas. These six actions were consolidated into one action.  Four shareholder derivative actions were filed, purportedly on our behalf.  On September 7, 2007, we reached agreements in principle to settle all pending securities class action and derivative lawsuits in consideration of payments totaling $16.6 million in exchange for full and complete releases for all defendants, of which Key will be required to pay approximately $1.1 million.  We received final approval of the settlement of the shareholder class action claims by the court on March 6, 2008 and preliminary court approval on the derivative actions on April 18, 2008.   Final approval on the derivative action is anticipated to occur in the third quarter of 2008. We have recorded an appropriate liability for this matter.

Expired Option Holders.    On September 24, 2007, Belinda Taylor, on behalf of herself and all similarly situated residents of Texas, filed a lawsuit in the 11^th Judicial District of Harris County, Texas, alleging that the Company breached its contracts with current and former employees who held vested options that expired between April 28, 2004 and the date that the Company became current in its financial statements (the “Expired Option Holders”). The suit also alleges the Company breached its fiduciary duties and duties of good faith and fair dealing in the pricing of stock options it granted to those Expired Option Holders, based upon the alleged overstatement of assets prior to the Company’s restatement. Ms. Taylor amended her lawsuit on September 25, 2007, to include all Expired Option Holders, regardless of residence. On March 6, 2008, the parties agreed to settle all pending claims with all Expired Option Holders, excluding those terminated for cause and those who have previously filed suits against Key, for approximately $1.0 million, which includes all taxes and legal fees, and we have recorded a liability in the amount of the settlement for this matter.  The settlement agreement is subject to court approval, which is expected to occur in the third quarter of 2008.

Automobile Accident Litigation.  On August 22, 2007, one of our employees was involved in an automobile accident that resulted in a third party fatality.  A lawsuit arising from this accident is currently pending in Jasper County, Texas.  We are vigorously defending against the claims in the lawsuit; however, at this time we cannot predict the outcome of the lawsuit.  Mediation is expected to occur in June 2008.  We have recorded an appropriate liability for this matter.

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Tax Audits.    We are routinely the subject of audits by tax authorities and have received some material assessments from tax auditors. As of December 31, 2007 and March 31, 2008, we have recorded reserves that management feels are appropriate for future potential liabilities as a result of these audits. While we believe we have fully reserved for these assessments, the ultimate amount of settlements can vary from our estimates. In connection with our former Egyptian operations, which terminated in 2005, we are undergoing income tax audits for all periods in which we had operations. As of March 31, 2008, the Company had recorded a liability of approximately $0.4 million relating to open Egyptian tax audits.  In the fourth quarter of 2007, the Company reached a preliminary settlement with the Egyptian tax authorities on the 2003 and 2004 tax years, recording a tax benefit of $0.7 million and reducing the tax liability accrued at December 31, 2007 to approximately $0.4 million.

Self-Insurance Reserves.    We maintain reserves for workers’ compensation and vehicle liability on our balance sheet based on our judgment and estimates using an actuarial method based on claims incurred. We estimate general liability claims on a case-by-case basis. We maintain insurance policies for workers’ compensation, vehicle liability and general liability claims. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The retention limits or deductibles are accounted for in our accrual process for all workers’ compensation, vehicular liability and general liability claims. As of March 31, 2008 and December 31, 2007, we have recorded $66.2 million and $69.0 million, respectively, of self-insurance reserves related to workers’ compensation, vehicular liabilities and general liability claims.  Partially offsetting these liabilities, we had approximately $9.4 million and $8.1 million of insurance receivables as of March 31, 2008 and December 31, 2007, respectively.

Environmental Remediation Liabilities.    For environmental reserve matters, including remediation efforts for current locations and those relating to previously-disposed properties, we record liabilities when our remediation efforts are probable and the costs to conduct such remediation efforts are reasonably estimated. Environmental reserves do not reflect management’s assessment of the insurance coverage that may apply to these matters at issue, if such coverage is available, whereas our litigation reserves do reflect the application of our insurance coverage. As of March 31, 2008 and December 31, 2007, we have recorded $2.9 million and $3.1 million, respectively, for our environmental remediation liabilities.

We provide performance bonds to provide financial surety assurances for the remediation and maintenance of our Salt Water Disposal (“SWD”) properties to comply with environmental protection standards. Costs for SWD properties may be mandatory (to comply with applicable laws and regulations), in the future (required to divest or cease operations), or for optimization (to improve operations, but not for safety or regulatory compliance).

Argentina Payroll Matters.    Our Argentinean subsidiary, Key Energy Services S.A., had previously underpaid social security contributions to the Administración Federal de Ingressos Públicos (“AFIP”) as a result of applying an incorrect rate in the calculation of our obligations. Additionally, we also underpaid AFIP as a result of our incorrect use of food stamp equivalents provided to employees as compensation. The correct amounts have been reflected in these financial statements. On May 31, 2007, we paid AFIP $3.5 million, representing the cumulative amount of underpayment and interest. As a result of our underpayment, AFIP imposed fines and penalties against us and began an audit of our filings made to them in prior years. In March 2008, we received notification from AFIP that the audit was complete with respect to this matter and that no additional monies were due.

11.          SHARE REPURCHASE PROGRAM

On October 26, 2007, the Company’s Board of Directors authorized a share repurchase program, in which the Company may spend up to $300.0 million to repurchase shares of its common stock on the open market. The program expires at the end of the first quarter of 2009.  At March 31, 2008, the Company had $202.6 million of availability under the share repurchase program to repurchase shares of its common stock on the open market.  During the first quarter of 2008, the Company repurchased an aggregate of approximately 5.2 million shares at a total cost of approximately $65.3 million, which represents the fair market value of the shares based on the price of the Company’s stock on the dates of purchase.  Since the inception of the program in November 2007 through March 31, 2008, we have repurchased an aggregate of approximately 7.5 million shares for a total cost of $97.4 million.  Under the terms of our Senior Secured Credit Facility, we are limited to stock repurchases of $200 million if our consolidated debt to capitalization ratio, as defined in the Senior Secured Credit Facility, is in excess of 50%.  As of March 31, 2008, our consolidated debt to capitalization ratio was less than 50%.

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12.          EARNINGS PER SHARE

We present earnings per share information in accordance with the provisions of SFAS No. 128, “Earnings Per Share” (“SFAS 128”). Under SFAS 128, basic earnings per common share is determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the “as if converted” method.

The diluted earnings per share calculation for the quarters ended March 31, 2008 and 2007 exclude the potential exercise of 1.9 million and 18,000 stock options at weighted-average exercise prices of $14.63 and $16.25, respectively, because the effects of such exercises on earnings per share in those periods would be anti-dilutive.  These options would be anti-dilutive because their exercise prices were higher than the average price of the Company’s common stock during the three month periods ended March 31, 2008 and 2007, respectively.

13.          SHARE-BASED COMPENSATION

The Company recognized employee share-based compensation expense of $3.7 million and $2.3 million during the three months ended March 31, 2008 and 2007, respectively.  The related income tax benefit recognized was $1.0 million and $0.7 million for the three months ended March 31, 2008 and 2007, respectively.  The Company did not capitalize any share-based compensation during the three months ended March 31, 2008 and 2007.

The unrecognized compensation cost related to the Company’s unvested stock options, restricted shares, stock appreciation rights, and phantom shares as of March 31, 2008 was $5.9 million, $4.2 million, $2.2 million, and $2.8 million,  respectively and are expected to be recognized over a weighted-average period of 1.1 years, 0.5 years, 1.4 years and 1.3 years, respectively.

14.          SEGMENT INFORMATION

The following table sets forth our segment information as of and for the periods ended March 31, 2008 and 2007:

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The following table presents information related to our foreign operations (in thousands of U.S. Dollars):

(1) Revenue-generating operations for our Mexican subsidiary did not begin until the second quarter of 2007.

15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

During the fourth quarter of 2007, we issued $425.0 million of 8.375% Senior Notes due 2014 (the “Notes”), which are guaranteed by virtually all of our domestic subsidiaries, all of which are wholly-owned. The guarantees were joint and several, full, complete and unconditional. There were no restrictions on the ability of subsidiary guarantors to transfer funds to the parent company.

As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information pursuant to SEC Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

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CONDENSED CONSOLIDATING BALANCE SHEETS